Acme Corp. makes vending machines for small companies. They have recently started selling their vending machines in Southern California, with a great deal of success, at a price of $5,000 per machine. The company is convinced that they will need to either build a new plant near San Diego or expand their existing plant in New Orleans. If they build a new plant near San Diego, the annual fixed costs will be $6,000,000 and the variable costs will be $3,000 for each vending machine delivered to Southern California. If they expand the New Orleans plant, their annual fixed costs for the expansion will be $2,000,000 and the variable costs will be $4,000 for each vending machine delivered to Southern California.
(a) Determine the break-even quantity for building the new plant near San Diego.
(b) Determine the break-even quantity for expanding the plant in New Orleans.
(c) At what output will the two locations have the same total cost?
(d) Assume that the demand forecast is less than the output in part c. Which option should the company choose?

Question

Quizplus · Accepted Answer

The Answer of Acme Corp. makes vending machines for small companies. They have recently started selling their vending machines in Southern California, with a great deal of success, at a price of $5,000 per machine. The company is convinced that they will need to either build a new plant near San Diego or expand their existing plant in New Orleans. If they build a new plant near San Diego, the annual fixed costs will be $6,000,000 and the variable costs will be $3,000 for each vending machine delivered to Southern California. If they expand the New Orleans plant, their annual fixed costs for the expansion will be $2,000,000 and the variable costs will be $4,000 for each vending machine delivered to Southern California.
(a) Determine the break-even quantity for building the new plant near San Diego.
(b) Determine the break-even quantity for expanding the plant in New Orleans.
(c) At what output will the two locations have the same total cost?
(d) Assume that the demand forecast is less than the output in part c. Which option should the company choose?

Acme Corp Makes Vending Machines for Small Companies